FarmPolicy

April 18, 2014

Farm Bill, Administration Transition, and Ethanol

DTN writer Russ Quinn reported yesterday (link requires subscription) that, “USDA’s proposed change in the definition of an ‘actively engaged’ farmer is a step in the right direction, Sen. Charles Grassley, R-Iowa, said Tuesday in his weekly teleconference with members of the ag media [MP3 replay available here].

USDA released information Friday, Dec. 19, detailing changes in rules on payment limits, income eligibility and active role in the farm under the 2008 farm bill. USDA said the interim final rules would appear in the Federal Register sometime this week, though it did not specify which day. Once the rules are published in the Federal Register, farmers will have 30 days to comment on the new rules.

“Under the new rules, individual farmers and entities must be ‘actively engaged’ in a farm to collect payments and benefits. To be actively engaged in farming, a person must make ‘significant contributions’ to the farming operation through capital, equipment, land, or a combination; and personal labor or active personal management, or a combination.”

The DTN article explained that, “Grassley, who for many years has pushed for limitations on those who receive government payments, said the change in the definition of an actively-engaged farmer is a step in the right direction.

“‘I look forward to these possible changes from the Ag Department,’ Grassley said.

“Grassley said he believes the changes will be published in the Federal Register sometime before President-elect Barack Obama is inaugurated on Jan. 20. He said the new administration will be more receptive to his push for payment limitations than the current administration ever was.”

Mr. Quinn also noted that, “Having a fellow Iowan, former Iowa Governor Tom Vilsack, as the new agriculture secretary should also help his cause, Grassley said.

“‘I believe this could be a dramatic move by the USDA,’ he said.”

In news regarding the executive branch transition and what a new Secretary of Agriculture may mean for the future direction of U.S. farm policy, Kim Severson reported in today’s New York Times that, “From the moment it was clear that Barack Obama was going to be president, people who have dedicated their lives to changing how America eats thought they had found their St. Nicholas.”

The Times article stated that, “Parents want better public-school lunches. Consumer groups are dreaming of a new, stronger food safety system. Nutrition reformers want prisoners to be fed less soy. And a farmer in Maine is asking the president-elect to plow under an acre of White House lawn for an organic vegetable garden.

Although Mr. Obama has proposed changes in the nation’s farm and rural policies and emphasizes the connection between diet and health, there is nothing to indicate he has a special interest in a radical makeover of the way food is grown and sold.”

The article added that, “Last week, Mr. Obama appointed Tom Vilsack, the former governor of Iowa, which grows much of the nation’s corn and soybeans. Mr. Vilsack has talked about reducing subsidies to some megafarms, supports better treatment of farm animals and wants healthier food in schools. But his selection drew criticism because he is a big fan of alternative fuels like corn-based ethanol and is a supporter of biotechnology, both anathema to people who want to shift government support from large-scale agricultural interests to smaller farms growing food that takes a more direct path to the table.”

And Mark Neuzil noted yesterday at the MinnPost.com webpage that, “The basic rap on Vilsack is that he is a conventional big ag guy. And mainline farm groups and the giant chemical companies like Monsanto aren’t helping his reputation among the progressives by praising his appointment.”

The update indicated that, “Much of the criticism of the two-term governor, who is a lawyer, comes because of his support for genetically modified food and corn-based ethanol. (Could he get elected governor of Iowa without those positions?) But there are other issues – ones that have been overlooked – that make Vilsack less of a company man than his opponents are implying.”

Mr. Neuzil stated that, “For example, Vilsack consistently supported local control of hog confinement operations. In Iowa, the state regulates the sitting of factory farms; cities and counties have virtually no say. This removes the NIMBY [Not In My Back Yard] factor from factory farm placements and has allowed, critics say, big pig lots to land wherever they please. (Vilsack’s attempts at local control were consistently blocked by the state legislature.)

Vilsack also called for a study to be conducted by Iowa State University and the University of Iowa to document the dangers of ammonia and hydrogen sulfide coming from factory farms. This effort, which led to a bill to regulate air emissions from livestock confinement facilities, was also stopped by the legislature.”

In a more specific analysis of how the Obama administration may look at one of the largest domains under the jurisdiction of the Department of Agriculture, nutrition and feeding programs, Jane Black reported in today’s Washington Post that, “The worsening economic crunch is causing the tab for food assistance programs to balloon, and with the rising costs has come an intensifying debate over whether — and how — the U.S. government can tackle simultaneously the paradoxically linked problems of hunger and obesity.”

The Post article explained that, “The statistics spell out the dilemma. The number of Americans on food stamps topped 31.5 million in September, a record high. Obesity, too, is at epidemic levels: In 30 states, at least 25 percent of the population is dangerously overweight. Nationally, 31.9 percent of children are considered overweight or obese.

For decades, the government has treated hunger and obesity as unrelated phenomena. But at a news conference last week in Chicago, Tom Vilsack, President-elect Barack Obama’s choice for agriculture secretary, said he would put ‘nutrition at the center of all food assistance programs,’ a signal that he will get involved next year when Congress moves to reauthorize nutrition programs that support school breakfasts and lunches as well as summer food for children.”

Ms. Black added that, “‘For a long time, we’ve looked at hunger and obesity separately,’ said Sen. Tom Harkin (D-Iowa), chairman of the committee that will draft the legislation. ‘It’s not a zero-sum game.’

“Public health advocates have long hoped to link food assistance to good nutrition. To the anti-hunger lobby, however, mandating what kind of food needy people should eat is impractical and smacks of paternalism. It would be impossible, they say, to determine which of the 50,000-plus products in the grocery store should be classified as healthful.”

Today’s Post article also noted that, “More important, anti-hunger activists say, low-income people often choose higher-calorie snacks and fast food because such fare is cheaper and more readily available where they live than nutritious fruits and vegetables. The District’s Ward 8, for example, had no full-service supermarket for nine years until a Giant Food store opened last December.

“‘If there are areas in cities where there isn’t an apple for sale within a mile radius, restricting food stamps goes beyond paternalism to a form of abuse,’ said Jim Weill, president of the Food Research and Action Center, a D.C.-based anti-hunger policy organization.”

[Note: For additional related research material on this issue, see “Food Stamps and Obesity: What We Know and What It Means,” an easy to read article from the ERS Amber Waves publication (June 2008)].

Meanwhile, in a related article regarding the cost of food, Bloomberg writer Alan Bjerga reported yesterday that, “U.S. food inflation may fall to no more than 4.5 percent in 2009 as lower dairy costs give consumers relief from this year’s price gains, the highest in almost three decades, the U.S. Department of Agriculture said.

The forecast for lower inflation, estimated at as high as 6 percent this year, follows declines in commodity prices from records set earlier this year, the USDA said today in a monthly report. Crude oil, a major determinant of transportation costs, has plunged 74 percent from a record $147.27 a barrel in July, based on New York trading. Corn, wheat and soybean prices all have dropped at least 46 percent from all-time highs this year.

“‘As commodity food and energy costs have declined over the past few weeks, pressure on retail food prices has started to subside,’ Ephraim Leibtag, a USDA food economist, said in today’s report. ‘The main effects of this drop could result in lower expected retail food price inflation in 2009.’”

The Bloomberg article indicated that, “The overall 2009 food-inflation projection for a rise of 3.5 percent to 4.5 percent was unchanged from November’s forecast.

“The U.S. Bureau of Labor Statistics, which supplies the data used by the USDA for its forecasts, said in a Dec. 16 report that food costs rose 0.2 percent last month after a 0.3 percent increase in October. Expenses for edible items account for almost a fifth of the U.S. consumer price index, which fell a record 1.7 percent in November on a plunge in oil and raw-materials costs.”

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Recall that the corn-based ethanol industry has often been implicated in the debate over food inflation. However, a recent article in The Des Moines Register noted that, “The industry’s old worries of being political targets in environmental- and food-versus-fuel debates has been replaced by a more pressing issue, making a profit and staying in business.”

As food inflation pressure softens slightly, and the profitability of corn-based ethanol draws focus, attention has turned to the possibility of federal stimulus dollars being allocated to assist this sector of the agricultural economy.

The Wall Street Journal editorial board noted in today’s paper that, “Along with Russia, Venezuela, Iran and the Dubai property market, add another name to the list of bubble economies hurt by the falling price of oil: the ethanol industry. And naturally, the ethanol lobby is looking for a bailout on top of its regular taxpayer subsidies.

“The commodity bust has clobbered corn ethanol, whose energy inefficiencies require high oil prices to be competitive. The price of ethanol at the pump has fallen nearly in half in recent months to $1.60 from $2.90 per gallon due to lower commodity prices, and that lower price now barely covers production costs even after accounting for federal subsidies. Three major producers are in or near bankruptcy, including giant VeraSun Energy.”

The Journal editorial stated that, “So here they go again back to the taxpayer for help. The Renewable Fuels Association, the industry lobby, is seeking $1 billion in short-term credit from the government to help plants stay in business and up to $50 billion in loan guarantees to finance expansion. The lobby would also like Congress to ease the 10% limit on how much ethanol can be added to gasoline for conventional cars and trucks — never mind the potential damage to engines from such an unproven mix.

Of course, the ethanol industry wouldn’t even exist without the more than $25 billion in taxpayer handouts over the past 20 years. Congress only recently passed energy and farm bills that further greased ethanol production with a 51 cent a gallon tax credit, corn subsidies, plus increasingly stringent biofuel mandates. We were told, as usual, that profitability was just around the corner.”

The Journal editorial board added that, “Don’t expect Congress to listen. Ethanol may never be profitable in the real world, but in Washington it’s a lucrative business that provides jobs and votes. Like Fannie Mae and Freddie Mac, ethanol is a business created by Congress that now has to be bailed out to save Congress from embarrassment.”

In a related article addressing the correlation between the price of oil and the price of grains, Jeff Caldwell reported yesterday at AgricultureOnline that, “From $147 to under $40 per barrel. That’s the swing in prices seen in 2008 in the crude oil market. And, if you’ve marketed corn or soybeans in the last two years, the price you’ve gotten has no doubt been heavily influenced by the price of black gold.

“The bond between the grains and crude oil prices has been a strong one throughout the year up until recent weeks, when it’s appeared at times that bond has broken. But, have the grains truly divorced themselves from the crude oil market?

The biofuels industry has been the glue holding the grains and crude oil together. That’s why corn prices spiked alongside oil this past summer, and partly why the grains took a similar slide as crude began its tumble this fall. But now, that glue is starting to dry up, says Iowa State University (ISU) ag economist Chad Hart.”

Mr. Caldwell noted that, “‘The buildup of the biofuel industry has led to the formation of a fairly strong relationship among crude oil, corn and soybean prices. Since the beginning of 2007, the correlation among the three prices is well over 0.9, indicating that the prices are moving together,’ Hart says. ‘Prices in the crop markets have dropped dramatically over the past five months, in combination with declines in energy prices and stock declines.

“‘As corn and soybean prices rose earlier this year, we could point to strong export demand, growing biofuel demand and significant feed demand. Now all three of those demand sectors have shown signs of weakness,’ Hart adds.”

The article indicated that, “What’s developed now, he says, is a different trend in which the bond among the commodities has been weakened. As proof of this, the economist notes crude oil’s price nosedive has been considerably sharper than that in the grains.

“‘Crude oil has experienced a much deeper price decline than either of the crops,’ Hart says. ‘Since the beginning of September, crude oil prices are down 50% while corn prices are down 39% and soybean prices have fallen by 32%. Most of this separation has occurred since mid-October.’”

The AgricultureOnline article added that, “‘I think we have shown some independence lately from crude prices in the grains,’ Lespinasse [Grainanalyst.com floor trader and market analyst Vic Lespinasse] says. ‘Before, they were in lock-step with crude, but I don’t think that’s true quite as much now. Certainly for a long time, we were totally dependant on what crude was doing, but that’s been lessened considerably.’

This doesn’t mean future movement in the crude oil market won’t affect the grains, however. Lespinasse says he’s skeptical to call the bond broken. Any big moves down the road, as well, could put the grains right back where they were earlier this year, at crude oil’s side.”

Keith Good

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